The current economic situation in GermanyDeutsche Bundesbank Monthly Report February 2024 5Fed Chair Jerome Powell expressed the view that interest rates in the United States had probably reached their peak, and that key inter-est rate cuts could follow in 2024. This contrib-uted to an appreciation of the euro against the US dollar. US inflation was slightly higher than anticipated in January, causing these expect-ations that key interest rates would come back down soon to weaken somewhat. In light of the continued robustness of US macrodata em-anating in particular from the labour market in the new year, however, investors’ confidence in a soft landing for the US economy in the event of a decline in inflation increased overall. In the euro area, some members of the ECB Govern-ing Council indicated that they regard a key interest rate cut in summer as conceivable. Against this backdrop, market participants an-ticipated distinctly earlier and sharper key inter-est rate cuts than previously assumed, given the more optimistic inflation expectations and the relatively subdued European economic out-look. Both currency areas saw a significant de-cline in long- term nominal and real interest rates in this setting: a development which, coupled with a sustained robust risk appetite on the part of market players, resulted in sig-nificant price gains for risky assets.Eurosystem leaves key interest rates unchangedAt its monetary policy meetings in December 2023 and January 2024, the Governing Council of the ECB left its three key interest rates un-changed. According to the Eurosystem staff’s December projections for the euro area, infla-tion is expected to decline gradually over the course of 2024 before approaching the 2% tar-get in 2025. In January, the Governing Council noted that the incoming data since December broadly confirmed this expectation. Overall, on the basis of its December and January assess-ments, it continued to hold that the key inter-est rates had reached levels that would make a substantial contribution to the timely return of inflation to the target. For this to happen, though, the key interest rate levels would have be maintained for a sufficiently long duration.In December 2023, the Governing Council also decided to advance the normalisation of the Eurosystem’s balance sheet. It intends to con-tinue to reinvest, in full, the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) during the first half of 2024. Over the second half of the year, it plans to reduce the PEPP portfolio by €7.5 billion per month on average, and to fully discontinue the reinvest-ment of redemptions by the end of 2024.Recovery in demand for short- term loans in the euro area signals turning point in credit growthIn the final quarter of 2023, the broad monet-ary aggregate M3 recorded growt...
